UPDATE 3-Delhi chief minister takes on Indian tycoon over gas pricing

* Heated political atmosphere with general election due by May (Adds Reliance reaction)

By Nidhi Verma

NEW DELHI, Feb 11 (Reuters) - Delhi's new chief minister took his anti-graft campaign to new heights on Tuesday, ordering an investigation into India's richest man, Reliance Industries Chairman Mukesh Ambani, and policymakers over gas pricing.

Arvind Kejriwal and his Aam Aadmi, or Common Man, Party (AAP) won the Delhi state election in December with promises to fight corruption and to tackle high utility prices.

The investigation being opened is the latest salvo against the tycoon over natural gas produced from the Reliance-operated D6 block on India's east coast.

Kejriwal said Ambani's company had created an artificial shortage to "blackmail" the government to set higher prices.

"We believe that high prices are being caused by corruption," Kejriwal told a news conference, speaking in Hindi.

In a statement, Reliance called the allegations "baseless" and said it could take legal action in response.

Reliance has long maintained geological complexities have pushed production lower. The country's upstream regulator believes the company failed to drill the number of wells approved in the development plan.

"The complaint and each of the allegations on the basis of which the Delhi Government has taken such action are completely baseless and devoid of any merit or substance whatsoever," Reliance said.

Reliance shares fell 2 percent in a flat Mumbai market.

Kejriwal's attack plays into a heated political atmosphere, with a general election due by May.

Leading a party formed just a year earlier, Kejriwal's victory in Delhi stunned the ruling Congress Party and opposition Bharatiya Janata Party (BJP).

The BJP is ahead in opinion polls as the public grows disillusioned with Congress, which leads the ruling coalition, over a series of corruption scandals and a slowing economy. Although it is unlikely to win, AAP could draw votes away from both parties.

'WELLS BELONG TO US'

Reliance had agreed to supply gas to utility NTPC Ltd at about $2.3 per million British thermal units (mmBtu) for about 17 years. But the price of gas from D6 was fixed at $4.2 per mmBtu in 2007 when Murli Deora was oil minister, in the Congress-led government.

Last year, after Veerappa Moily took over as oil minister, the federal government decided to move to market-linked pricing, which could double local gas prices from April 1 this year.

An FIR, or first information report, is the first stage of an official investigation into a complaint. Kejriwal said he had acted after receiving four complaints.

He said he would ask the federal government to suspend any order to raise gas prices until the issue was resolved.

"The wells belong to us. If Reliance and Mukesh are not producing gas in order to create an artificial scarcity, then the government should look at giving these wells to the (state-run exploration company) ONGC and some other entity which can operate them and produce gas," he said.

Ambani is the richest man among India's ranks of billionaires, with an empire that ranges from energy to mobile phones and media. Last year, he was given security cover by the government following threats against his life.

WATER FROM A WELL

The D6 block was expected to contribute up to 25 percent of gas for Asia's third-largest economy but its lower-than-expected output has left the energy-hungry nation more dependent on expensive, imported liquefied natural gas (LNG) to fuel power and fertiliser plants.

Oil Minister Moily, asked for his reaction, said he had taken a special interest to ensure that gas prices were reduced.

"It is not the question of Mukesh or Deora or anybody," he said, speaking on television. There was a system for fixing prices and nothing was done without expert advice, he said.